New D.C. Law Protects Injured People from Excessive Health Insurer Subrogation

A new law may help injured victims in personal injury cases keep more of the money they win in settlements and verdicts.  D.C. recently enacted the “Health Care Benefits Lien Reduction Act of 2016” which modifies the rights of health insurers in a personal injury case.  This law is codified as D.C. Code § 31-3551.  Health insurers have no obligation to tell their insureds about this statutory reduction.  This law has not yet been interpreted by the courts, and thus clarifications of its application are likely.

By way of background, health insurance plans often provide themselves a contractual right of “subrogation” in their plan documents.  In doing so, the health insurer (or “subrogee”) is contractually entitled to recover some or all of the amounts actually paid by the health insurer out of a personal injury settlement or verdict.   The new law limits the subrogee’s rights in two important ways, creating fairness for many people injured in accidents:

First, the subrogee is required to provide an automatic percentage reduction of the health insurance lien to account for the attorneys fees and case expenses that the injured person bore in obtaining a settlement or verdict.   The exact percentage of the reduction is determined adding the attorneys’ fees and case expenses, then dividing this number by the “total recovery.”

  • Example: Assume John Q. Client was injured in a car accident and received a total recovery of $100,000.  His attorney fee of 40% equaled $40,000 and his case expenses were $5,000. Assume his health insurer had paid $18,000 toward his medical care.  In this scenario, the health insurer would be required to reduce its subrogation claim by 45%.   This percentage is determined as follows:  ($40,000 fee + $5,000 expenses) / $100,000 total recovery.  Because the health insurer had paid $18,000, it would be required to reduce its claim to $9,900 or less (subtracting 45% of $18,000).

Second, the subrogee’s amount permitted to be recovered “shall not exceed one-third of an injured person’s recovery.”   Thus, with a particularly large lien and a relatively small settlement, the subrogee will be limited to one-third of the client’s net settlement proceeds after deduction of attorneys fees and expenses.

  • Example:  Using the same facts above, but instead assume John Q. Client’s health insurer had paid a whopping $92,000 toward his claim (but Client could only obtain the same $100,000 settlement, which was the maximum recoverable due to the bad driver’s auto insurance limits).   In such cases, health insurers used to demand as much as the full $92,000, leaving the client with little or nothing.  In this case, D.C. Code 31-3551(b)(2) protects the injured person from an unreasonable result by limiting the health insurer’s claim to one-third of Client’s recovery.  John Q. Client recovered only $55,000 in the above scenario ($100,000 minus $40,000 in attorneys fees and $5,000 in expenses), and therefore the health insurer is only entitled to recover $18,333.33 (1/3 of $55,000), even though the health insurer had paid $92,000.

Exceptions to this new law include (1) if the subrogree intervenes in the case with its own lawyer; (2) if the subrogee has already offered a reduction larger than the statutory reduction (no-double reduction); or (3) if the D.C. Medicaid program has paid the health benefits.  There are also potential preemption issues for certain types of health plans regulated by the federal government.  While other legal doctrines (e.g., the “made whole” doctrine) may have allowed parties to argue for a reduced health insurance subrogation before D.C. Code § 31-3551 came into effect, those doctrines had been watered down by years of health insurer litigation.

Notably, D.C.’s law differs in language from laws addressing similar issues in Virginia (which has a complete anti-subrogation rule and corollary auto med-pay rule) and Maryland (which limits the reduction percentage instead of insurer’s total recovery).  D.C.’s new law may be seen as a middle ground between the two jurisdictions — permitting some health insurer subrogation recovery (unlike Virginia), while favoring the injured victim in those cases where the lien would have created a larger recovery for the health insurer under current Maryland or prior D.C. law.

Because this is a complex area of law, many other statutes and legal doctrines may affect the analysis of a particular claim, and this is not to be construed as legal advice for any particular situation.